The Security and Exchange Commission (SEC) has been after Kik since the start of their Kin Coin ICO in September of 2017. What started as a simple request for information has grown into an intriguing debate and now the SEC has formally sued Kik for US securities violations relating to their 2017 ICO which raised close to $100 million. Updated June 4, 2019
By selling securities without registering the offers or sales, the SEC is alleging that Kik “deprived investors of information to which they were legally entitled, and prevented investors from making informed investment decisions,” said Steven Peikin, co-director of the SEC’s Division of Enforcement.
Just a few weeks ago, the Kin Foundation has launched a legal defense fund in partnership with Coinbase hope to have leverage in forcing the SEC’s hand into creating a clear framework for a rapidly expanding new industry. Find out everything you need to know about these two opposing forces and determine for yourself which side will persevere.
What is Kik?
Kik is a social media messaging company based out of Waterloo, Ontario, Canada. Founders Ted Livingston and Christopher Best launched the first version of the Kik app in 2009. Just a few short weeks later, close to a million users had downloaded Kik Messenger.
What’s the Difference Between Kik and Kin?
For those of you who are new to Kin and Kik, here’s a brief description of the main players:
- Kik is the popular messaging app with over 2.4 million downloads on Google Play
- Kin is the cryptocurrency used within the Kin Ecosystem. Current market cap is $25.75 million (updated May 29, 2018, to $87.91 million).
- KinEcosystem.org is the crypto-based environment created for Kik users. –
- The Kin Foundation oversees the Kin Ecosystem, ensuring that the vision of full decentralization is realized. This organization is governed by an independent board.
- The Kin ICO held in September 2017 raised close to $100 million and is at the heart of the SEC investigation.
Kik’s widely popular messaging app is actually part of the Kin ecosystem for users and app developers, which is different from the app store in a few major ways, including:
- The content of its users’ messages is not bought, sold and traded by the giant advertisers, as they are with FB messenger and WhatsApp.
- App developers can earn for their apps, instead of being at the whim of the market to create free
appsand depend on user numbers to get ad dollars.
SEC Commissioners file lawsuit
In early 2019, four SEC commissioners were preparing to vote on the future of Kik and its Kin Coin. The SEC, as part of their cryptocurrency regulation movement, is mandating that Kik bring the Kin ICO under securities regulations. Meanwhile, the Kik team adamantly explains how this is a wrong action by the SEC.
On June 4th, 2019, the SEC filed a lawsuit against Kik Interactive for US securities violations. The 200-point filing culminated in the SEC requesting that the court make judgments in the following three charges brought against Kik:
- “Permanently restraining and enjoining Defendant Kik Interactive Inc. from, directly or indirectly, violating Section 5(a) and (c) of the Securities Act [15 U.S.C. § 77e(a), § 77e(c)]
- Ordering Defendant Kik Interactive Inc. to disgorge all ill-gotten gains or unjust from the activities set forth in this Complaint, together with prejudgment interest thereon
- Ordering Defendant Kik Interactive Inc. to pay a civil penalty pursuant to Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)]
- Granting such other and further relief as this Court may deem just, equitable, or necessary in connection with the enforcement of the federal securities laws and for the protection of investors.” – SEC filing against Kik
Kik’s response to the SEC filing
In a Kik Interactive press release published shortly after the filing, the Kik team reiterated their willingness to go to court so they could clear up what they view as misinformed assumptions on the part of regulators.
“The SEC’s complaint against Kik also presents a highly selective and grossly misleading picture of the facts and circumstances surrounding our 2017 pre-sale and token distribution event. We look forward to presenting the full story in court.”Ted Livingston, Kik’s CEO
Kin may be the example going forward
This is a hallmark and high profile case that could quite possibly affect the future of
This action by the SEC comes after an 18-month parlay between the SEC and the Kik team. Kik, having gone over and above in complying with the SEC’s fledgling regulation policies, issued a formal response. They would not register Kin as
“I believe every ICO I’ve seen is a security.” – SEC Chairman Jay Clayton
“Kin is one cryptocurrency that truly is a currency.” – Ted Livingston, Kik Messenger Founder
Is Kin a Currency or Not?
The above two quotes really get to the meat of the issue. As it is, the SEC considers most all ICO tokens to be securities. However, Kik explains in their legal response to the SEC why Kin is not and has never been
The Kik team and their hefty team of legal defenders are ready to take this all the way. They’ve clearly outlined their legal reasoning (summarized later in this article) and are confident that the courts will rule in their
The SEC May Have Picked the Wrong ICO to Mess With
Government entities at times use high profile cases to gain the public’s attention, creating awareness and thus warding off other potential offenders. In this case, they may have chosen to put Kik against the rails because of their prior press disasters.
Press Problem #1
A CBS edition of 48 Hours featured the Kik messenger app as a “predator’s paradise”. The segment reported that Kik had been a favorite of American law enforcement agencies. The authorities used it to pose as
The Kik team publicly admitted they weren’t doing enough to stop predators on their app. They’ve also committed themselves to doing better. On their homepage today, you can plainly see their efforts and dedication to the problem:
Press Problem #2
Two and a half years and $100 million later, the team at Kik has yet to deliver if you go by the app’s reviews. Many are brimming with accounts of glitches and lack of service:
On the day of this writing, Kik has 2.4 million downloads on Google Play. Yet 9 out of 10 of the most recent reviews are negative.
[As someone who tested out Kik about a year ago, I found it to be on the annoying side. It was glitchy; I remember trying a horoscope bot that never worked properly. Chat help was unsuccessful. I also found many of the other features to be uninteresting (to me).]
Press Problem #3
While a student at the University of Waterloo in Ontario, Kik Founder Ted Livingston worked for Blackberry Ltd., owner of the soon to be doomed Blackberry messenger app. He later went on to develop a messenger app (Kik) that rivaled Blackberry’s. Subsequently, his former employer sued him for patent infringement in 2010.
Even so, it could not stop the rapid growth and popularity of the Kik app. The parties settled out of court and you can read more about that here.
Press problem #4
Within the 200-point summary of the filing, The SEC laid bare some of the grim realities of Kin/Kik’s major business failings. Namely, summary points #5 through #8. After reading through, it’s really hard to see how Kin could be in the right. They may lose community support if this information proliferates.
Kik has shown major resilience
On the other hand, Kik’s forward progression throughout lawsuits and horrid press stories says something about the company’s leadership. The Kik team has shown strong resilience in bouncing back from what seemed to be insurmountable problems with their image, and as many would argue their product.
One of their complaints against the SEC is that the agency has been pursuing regulation by enforcement, which they claim has been done in light of a complete lack of guidance for cryptocurrency startups. Regulation by enforcement may only work with high profile cases like that of Kin. It’s also possible the SEC has met its match.
This time, the press problem stems from the SEC’s June 2019 filing. That’s because it includes exhaustive data pertaining to Kik and Kin’s mounting financial woes and their decision to issue a token. This move ended up being to the core team’s benefit and not so much to investors.
Major arguments by the Kin Foundation include these five:
5 Main Arguments Why Kin Coin is Not a Security
- According to SEC regulations, securities are never currencies. Kik has ample documentation that attests to its Kin Coin being a currency.
- “Not only has Kin been accepted for physical goods, such as sunglasses, but it is now available for use in over 30 digital applications in the Google and Apple stores. These include well-established applications, such as Perfect 365 with 100 million users, as well as new concepts such as
- Kik never marketed Kin Coin as an investment of any kind.
- “Investment contracts” do not come into play because no common enterprise exists between Kik and the Kin Foundation. The Kik legal teams strongly feel the SEC’s stance on this point will come under fire before a court.
- Kin users don’t hold an ownership interest in Kik or the Kin Foundation.
See the entire response by Kik’s legal defense team here
What Will Happen Next?
Over the past year, Kik and the Kin Foundation have taken substantial measures so that Kin Coin is in compliance with the law. The team firmly believes that further actions by the SEC will hurt all Kin users. Essentially, this could harm the same investors regulators are saying they need to protect. Not only that, a constrictive ruling could be an immense hit to the US blockchain and cryptocurrency industry.
Blockchain businesses are already flocking to countries where regulations are more realistic for digital currencies. Forcing compliance without having an SEC framework in place may further this exodus of American crypto companies who feel compelled to operate elsewhere.
Blockchain technology is only in its nascent stages now. However, many expect the industry to have a similar impact on our world as the internet itself. By burying itself in the securities mantra, the SEC may cause the loss of jobs and tax dollars related to the mushrooming blockchain technology space.
Contact the SEC and let them know how you feel about the way they’ve been handling cryptocurrency regulation and the Kin case:
Kin Foundation sets up legal fund
The Kin Foundation announced in May 2019 that they would be partnering with CoinBase to launch a Defend Crypto.org legal fund. This fund, which the Kin Foundation seeded with $5 million, will be used in their case against the SEC. Their hope is to provide legal expertise should the SEC pursue action against Kin/Kik.
What they’d like to see is the SEC coming up with a new Howey Test that better meets the needs for digital assets like Kin Coin. CoinBase will be holding another $5 million to weather the storm if the initial $5 million is not enough.
We’ll update this article on the tribulations of the Kin Coin as more news about the lawsuit becomes available. What we have to go on is the SEC filing, which seems highly biased. And then we also have the remarks by Kin Foundation and Kik Interactive. These are bound to have a partiality as well. It’s up to us to read and interpret the info we have available and formulate the best actions going forward.
Also published on Medium.